A Reckoning Approaches: Supreme Court and Obama's Healthcare Reform Law

SCENARIO #1: Uphold the ACA (45% possibility)

Most professional investors will probably say I'm being too optimistic, largely due to the government's oral argument debacle. Despite the extensive media attention paid to Solicitor General Donald Verrilli's poor showing in Court, several experts have suggested that oral arguments play a smaller role than the uninitiated would suspect. I don't really have the space or expertise to conduct a detailed examination of the Constitution's Commerce Clause -- which gives the Federal government power to regulate interstate commerce -- but it's not hard to believe healthcare and health insurance form an established market that is already deeply integrated into our society. We all have a need for healthcare at some point in our lives.

If the Court upholds the ACA, it would be a clear positive for healthcare since it removes the uncertainty that has hovered over the sector for years. By and large, publicly traded companies seem well prepared to deal with the law. Over the long-term, I think the ACA will most negatively impact medical device companies -- particularly behemoths such as Stryker (SYK), St. Jude (SYMBOL), Medtronic (MDT), Boston Scientific (BSX), and Zimmer (ZMH) -- due to the industry's limited innovation and ongoing pricing pressure, which will make it more difficult to pass along the cost of ACA-associated penalties.

SCENARIO #2: Repeal the ACA (20%)

Should SCOTUS rule the entire ACA unconstitutional, it would be a major rebuke of President Obama and a clear positive for the healthcare sector. The only losers would be the hospitals. The bull case for the publicly traded hospitals -- Tenet Healthcare (THC), Community Health Systems (CYH), HCA Holdings (HCA), Health Management Associates (SYMBOL), Lifepoint Hospitals (LPNT), and Universal Health Services (UHS) -- is that healthcare reform will expand coverage and thus largely eliminate bad debt expense, which is a persistent drag on earnings. I don't particularly like these businesses and suspect the long-term bull case is overly optimistic, so I am going to eschew these stocks. This scenario returns the U.S. healthcare system to its prior state and likely takes the prospects for reform off the table for a decade or more. Overall, I think this is a bad outcome for the country.

SCENARIO #3: Sever the Individual Mandate and Associated Clauses (15%)

This is the first of three main "severability" outcomes, each of which has different implications. Under this scenario, the individual mandate, which requires that everyone have health insurance or pay a penalty, and several related provisions such as guaranteed issue, which forbids denial of coverage, and community rating, which limits the premium differential between the healthiest and sickest individuals, would be stricken from the law. The profitability limits on managed care companies, known as medical loss ratio (MLR) minimums, might also be removed.

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